Conflicts of Interest. Are you managing yours?

If the conflict is deemed be extreme it should always be avoided. However lower level conflicts can be managed via appropriate internal procedures and disclosures. Such procedures are to ensure that the conflict does not cause an individual or entity to act to in their own interest at the expense of the client.

Clearly where conflicts do exist they must be disclosed to the client and this goes to the heart of the client making an "informed decision”. In effect the client must be able to understand how the conflict of interest might affect the substance and efficacy of a recommendation that is being made to them. It is, however, not only the fact that we should disclose to clients when we have a material conflict but also the manner in which such disclosures are made to ensure that it is effective i.e. disclosures should not be a lengthy attachment to a report full of non-specific dense legalese. Empirical evidence shows that most clients almost never read such disclosures and certainly don’t print them. It is therefore recommended that the disclosure documentation provided by the advisor to the client should clearly and concisely disclose the actual relationships associated with conflict and the disclosure should be in a prominent position.

In terms of the FAIS General Code of Conduct an advisor must have acted with due care and skill and in their clients’ best interest. This includes numerous statutory contact stage disclosures which includes conflicts of interest. The forthcoming Treat Customer Fairly environment further seeks to ensure that firms are fair in their dealings with clients and this naturally would include the disclosure of any conflicts.

Commission based sales have been the subject of some controversy in recent times and there is certainly a risk that conflicts of interest will arise where sales individuals are remunerated on a commission only basis, particularly when such individuals are under pressure to make sales to reach targets. Once again it is important that clients are aware that such individuals are remunerated by commission and in many cases are given clear incentives to sell products of a provider or are actually restricted to the in-house product set. A common situation arises whereby the company providing advice is also an owner or partial owner of the recommended product. The advisor will naturally gravitate towards sending clients to an in-house product as opposed to an external one particularly if encouraged via incentives to do so.

In summary conflicts of interests do exist and must be managed as they will certainly impact on the quality of advice rendered. Disclosure alone is rarely sufficient to manage the conflict and accompanying internal controls are generally needed. At the very least a basic policy document should be drafted laying out the company policy in respect of conflicts and identifying where they may occur and steps that are in place to manage them an investment environment policies in respect of insider and personal account trading are essential. Certain conflicts are so serious they will always cause actual harm to clients should be avoided and made a disciplinary offence if breached

Compliance officers and key individuals should work to ensure that conflicts of interest are identified and disclosed in their disclosure documentation that the client would receive at a contact stage.

In the current environment FSP’s that ignore conflicts of interest and do not bring them to the client’s attention will find it difficult to get past the "due care and fair treatment of client” test which is vital in the event of a client complaint.